Tax Retirement Planning: Maintaining A Comfortable Lifestyle
Longer life spans are a double-edged sword. On the one hand, you live longer – and that is definitely a good thing, don’t you agree? However, this also means that you have to support yourself (and perhaps even your spouse) long after you retire from the workforce. Since you no longer have a salary (and all the benefits that come with regular employment), it is crucial that you save up some money now – while you are still able to do so – so that you will have money to spend when you no longer have a steady source of income. This is where prompt and proper retirement planning comes in handy.
Before you start on this complex plan, you need to gather all tax returns you have filed for the past years. Then start reviewing tax strategies and/or estate planning that you’ve implemented. See if you are amenable to giving up legal rights over some of your assets to decrease your liability under current taxation laws such as placing them under trust or in the form of gifts to save on taxes. If so, make sure that appropriate beneficiaries are named for each financial account you open.
One other avenue left to you to minimize your taxes (and thus apply tax savings towards your retirement nest-egg) is to enroll or sign up with your company’s retirement plans. There are various plans available for you to choose from. For instance, ask your employer about your company’s 401k plan for its employees. You can also decide to set up your own private IRA account. These retirement plans usually have inbuilt tax breaks so that employees can save more money for their retirement.
Retirement Planning with an Individual Retirement Account (IRA)
The usual choices when it comes to using IRA as a tax saving tool are traditional IRAs and Roth IRAs.
On the one hand, contributions to traditional IRA accounts get deducted from your salary before income taxes are computed. This means that the contributions you will be making towards your retirement fund in this case is exempt from taxes. Moreover, your actual taxable income is reduced so you save even more on tax charges. However, after you retire and start withdrawing from your IRA account, your withdrawals are treated as regular income and are subject to income taxes. Thus, if you have been successfully able to manage your IRA account and have been able to earn a lot from investments using your IRA, both your original contributions and the IRA fund earnings are subject to income taxes. This actually makes the traditional IRA a deferred tax system rather than a tax exemption system.
On the other hand, Roth IRA contributions are part of your taxable income so you get no tax breaks there. However, the amount of money you accumulate in your Roth IRA account through your regular IRA contributions – not through earnings from IRA investments – become tax free even after you begin withdrawing them. You only get charged income taxes on the portion of your IRA withdrawals that are attributable to your fund’s earnings over and above your original contributions.
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